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When you’re in the process of saving money for retirement, CDs aren’t the best option. Although CDs are paying pretty generously right now, historically, that hasn’t always been the case. Plus, stocks have long outperformed CDs, making them a far better bet for building a nest egg.
But once you’re retired or on the cusp of retirement, it’s a great idea to keep some of your nest egg in cash. The reason?
The stock market is volatile. That’s OK when you’re building a nest egg and won’t touch that money for years. But in retirement, you may need that money soon. And it could be a problem if you need to liquidate some investments at a time when they’re down.
It’s important to not tie up all of your assets in stocks as a retiree. And while it’s smart to cash in a regular savings account, CDs are a good option as well because they allow you to generate guaranteed income.
CDs are an especially smart bet for retirees today because of the high rates. But it’s important to choose the right CD term.
You might assume that a long-term CD makes sense in retirement because you can lock in a risk-free return for an extended period. But remember, once you’re retired, you’re generally living off of your savings to some degree. And it can be hard to know what your income needs will look like in three or four years.
What if you need to move — say, to an area with warmer weather or a home that’s more friendly to limited mobility? What if your healthcare needs change and you need to hire some help in the home?
It can be risky to tie up your money for a lengthy period as a retiree due to all of this uncertainty. A shorter-term CD — say, a term of 12 months or fewer — might be your best starting point.
With a CD ladder, you take the money you’re looking to put into a CD, split it up, and open a series of CDs with staggered maturity dates. While you could open a 12-month CD today if you’re newly retired or right on the cusp, an even better bet may be to take your money and open a 3-month CD, 6-month CD, 9-month CD, and 12-month CD. This has a portion of your savings freeing up every three months in case something comes up.
That said, you may not need a CD ladder as badly if you’re following a smart rule of thumb for retirement, which is keeping enough cash in a regular savings account to cover 12 to 24 months of bills. The reason for this is that it could take 12 to 24 months for the stock market to recover from a slump. And you want the option to pay your bills during a time like that using cash without having to sell investments when their value is down.
If you’re following that rule, you may not have to do a CD ladder, because you might have access to enough cash that it’s OK to tie up your money for a solid year. But if you like to play it safe, a CD ladder certainly isn’t the wrong move, either.
It’s important to choose your CDs wisely as a retiree. Limiting yourself to shorter terms and laddering your CDs could be a smart strategy.
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